Bernanke's bargain with inflation

President Bush's choice to be the next chairman of the central bank, Ben Bernanke, has suggested the Federal Reserve start using "inflation targeting," a tactic that would provide greater certainty about price rises and, thankfully, shift the Fed chief away from being an inscrutable monetary wizard like the outgoing chief.

Alan Greenspan, of course, has been an able inflation fighter during his 18 years at the helm of the nation's money supply, as well as a great improviser of quick solutions to financial crises. But his obscure tweaking of the bank's many levers has been largely secretive and empirical, perhaps even seat-of-the-pants and difficult to imitate. He shunned fancy economic models in favor of being flexible in spotting new patterns, or "anomalies," among the reams of raw economic data.

Mr. Greenspan would never set numerical targets for the Consumer Price Index, as Mr. Bernanke suggested when he was a star academic at Princeton and leading monetary expert - although the two men probably agree that keeping inflation under 2 percent is a very wise course.

Inflation, however, has now approached 5 percent, mainly due to recent energy price hikes. That makes inflation targeting (which is practiced in many Western nations) suddenly attractive to both consumers and investors.

Even though Bernanke promised a "policy of continuity" when nominated by the president on Monday, his Senate hearings next month should be used to explore how much he really wants to bring greater transparency to Fed decisions by setting rigorous promises on its performance, especially in keeping inflation near zero.

It would be comforting for people saving for retirement or college to know how much inflation will eat into their investment 20 years hence. The current uncertainty over price stability only creates quiet panic.

The trick in inflation targeting is to practice it as a long-run rule, while leaving enough flexibility in setting interest rates to respond to short-term crises.

Greenspan has opened up the Fed somewhat, such as by releasing minutes of meetings. (The Supreme Court might want to follow suit.) Last March, in a speech, Bernanke said this "greater openness makes monetary policy more effective."

The Fed chief need not be set up as a global economic guru, even oracle, if the Fed's mechanics were better known and came with more certainty. Then the Fed could retain its independence, and reduce the impression that it is the main variant of the economy.

And it wouldn't matter as much what the chairman said about tax cuts, Social Security reform, or other hot political topics.

Bernanke is known as a plain-speaking and consistent straight shooter, traits that would be welcome in Fed policies and pronouncements. His openness will also help him as the primary defender of the US dollar and in fending off political pressure to boost economic growth and job creation by tolerating more inflation.

If he's approved, as widely expected, and takes office Feb. 1, Bernanke should bring a breath of clarity to the mysterious workings of the world's leading central bank.

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